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Tuesday, April 2, 2013

Goldman Launches New Unit to Invest in High-Risk Debt

Per The Wall Street Journal:

By KATY BURNE

Goldman Sachs Group Inc. GS +0.57% is launching a specialty finance company to invest in high-risk debt primarily of midsize U.S. companies with no credit ratings.

The New York firm said in a filing with the Securities and Exchange Commission late Friday that it plans to offer shares in the new unit, Goldman Sachs Liberty Harbor Capital LLC, "as soon as practicable after the effective date of this registration statement."

The unit is fashioned as a "business development company"—a type of investment vehicle that has grown in popularity over the past decade.

It is governed by the Investment Company Act of 1940, will use borrowed money, or leverage, and invest in smaller U.S. companies that typically don't have credit ratings through buying up their high-yielding debt and making and buying loans.

"We view this as a space that will continue to expand as part of an alternative lending segment," said Greg Mason, analyst at Keefe, Bruyette & Woods.

The new Goldman company comes as the New York securities firm seeks ways to boost revenue and provide returns to shareholders under tighter constraints on its own investing and requirements to hold more capital.

For years consumer groups and financial industry representatives have battled over whether financial advisers' services should be in their clients' best interests. Still, sometimes they're not.

Goldman is likely to invest some of its own money in the company and said in the filing that it expects the unit won't be covered by the Volcker Rule, a part of the Dodd-Frank financial regulatory overhaul that restricts banks from making bets with their own funds.

The bank plans to raise at least $600 million by selling shares in the new unit, said a person familiar with its offering plans.

A Goldman spokesman declined to comment beyond the filing.

The new unit is launching as Goldman is increasing its firect lending to midsize companies through its GS Bank division. The Liberty Harbor Capital LLC will be housed in its asset-management business.

Goldman is the first bank to create a business-development company, according to records from data provider Dealogic going back to 1995.

In recent years, private-equity firms and other types of investment-management companies have set up business- development vehicles to capitalize on lending to what they see as an underserved class of mid-size companies that need to borrow money. The first such companies were launched in the 1980s.

The companies are similar to mutual funds, but they use more borrowed money for investing, something Goldman said it plans to do. Business-development companies often offer higher returns than straight bond or loan investments.

Business-development companies have provided investors with returns of 6.65% this year, including yields and price changes, said Jonathan Bock, analyst at Wells Fargo WFC +0.22% Securities. They have returned more than 10% in several recent years. They have raised $508 million so far in 2013, after $3.6 billion last year, according to Wells Fargo.

The new Goldman unit qualifies as an emerging-growth company under the Jumpstart Our Business Startups Act of 2012, which could allow it to "take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies," said Goldman in the filing.

The unit wouldn't be required to have an outside audit of its internal controls, as long as it qualifies as an emerging-growth company.

Goldman said the loans and other assets it plans to put into the new company "typically are not rated by any rating agency," but that if they were rated they would be below investment grade. Such investments are likely to include high yielding investments called "leveraged loans" and "junk bonds," the bank said.